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Oil Tanker Stocks Win Upgrades: What You Need to Know

By Rich Smith - Mar 6, 2018 at 11:34AM

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DNB thinks DHT, Frontline, Teekay, and Gener8 could soon earn twice as much for their work.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking four high-profile Wall Street picks and putting them under the microscope...

2017 was not a great year to invest in oil tankers -- and so far, 2018 hasn't been much better. Over the past 12 months, shares of DHT Holdings ( DHT 0.89% ) are down 26%, Frontline ( FRO 2.07% ) stock is off 42%, and Teekay Tankers ( TNK 4.53% ) has lost 48%. Among oil tanker companies still boasting sizable market capitalizations, only Gener8 Maritime (NYSE: GNRT) is up, with a 17% gain.

But all that could be about to change. Today, analysts at Norwegian investment bank DNB ASA announced they're upgrading all four of these oil tanker operating companies to buy.

Here's what you need to know.

Front deck of an oil tanker

DNB thinks oil tanker stocks have a long path back to profit. Image source: Getty Images.

A bold prediction from the land of the Vikings

First things first: For American readers, I need to make clear that the DNB ratings upgrades we're talking about today do not come from Dun & Bradstreet, the company we normally think of when we hear DNB in the States. Instead, DNB ASA is the one making upgrades today, and that alone is pretty significant.

Norway, after all, is the world's 10th biggest oil-producing nation and, as such, a country with a vested interest in getting oil trends right. Given its involvement in the oil industry, it's also well-situated to sight trends in the oil market, and point them out. And DNB ASA is the largest financial services group in Norway. 

Simply put, there's a reason you want to listen when DNB talks about oil.

What DNB says about oil

2017 saw average carriage rates for tankers fall 50% and more "across the board," says Hellenic Shipping news. Day rates for chartering "Very Large Crude Carriers" (VLCCs) in particular fell 65%. Your average VLCC tanker chartered for less than $10,500 per day in 2017, or about one-third of the $30,400-per-day average rate in 2016. As their earning potential has declined, so have "asset prices" -- the resale value of the tankers themselves.

But according to DNB, this is about to change. Between now and 2020, DNB predicts that the resale value of VLCC tankers will rise 30%, and VLCC day rates will double, says, citing a story in Bloomberg. That still won't be enough to bring day rates up to 2016 levels, but it will be a big improvement on what tanker operators are earning today.

What could go wrong?

Not everyone is so optimistic as DNB. Citing widely different numbers, other sources suggest that at least as recently as late January, day rates for VLCC tankers were still heading south, with rates falling as much as 67% year over year through Jan. 19.

Argus Media warns that "ample tanker supply" is continuing to keep a lid of tanker day rates -- and the global fleet of very large tankers is growing. In 2017, for example, Argus says 47 new VLCCs were delivered, and only 22 old VLCCs converted or scrapped, resulting in a net increase in the global tanker fleet of 25 ships. Argus predicts we will see 52 new VLCCs delivered in 2018, and 29 more coming on line in 2019.

The upshot for investors

So some argue the global supply of tankers is continuing to grow, and will keep on growing through 2019 at least. And considering that three of the four oil tanker stocks that DNB recommended today -- Frontline, Teekay, and Gener8 -- lost money last year, and that the fourth, DHT, lost money in the last half of last year, this prospect of continuing and increasing oversupply in the tanker market gives investors good reason to worry.

It doesn't necessarily mean that DNB is wrong to predict a doubling of day rates through 2020, but it does suggest that pulling off those rate hikes is going to be difficult. Given the increase in supply of tankers available to haul oil from port to port, demand for oil is going to have to grow faster. Otherwise, DNB's prediction of a 100% increase in oil tanker rates will prove to be nothing more than a pipe dream.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Frontline Ltd. Stock Quote
Frontline Ltd.
$7.41 (2.07%) $0.15
Teekay Tankers Ltd. Stock Quote
Teekay Tankers Ltd.
$11.77 (4.53%) $0.51
DHT Holdings, Inc. Stock Quote
DHT Holdings, Inc.
$5.67 (0.89%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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